Over the past 30 years Caspian nations such as Azerbaijan and Kazakhstan have built thriving economies on oil and gas wealth led by global energy companies and a handful of megaprojects. As times change, that model may need to be reassessed. Nearly 30 years ago as the Soviet Union lay in tatters, Azerbaijan and Kazakhstan signed off on the Caspian’s first oil and gas megaprojects, hoping to guarantee their independence by transforming the region’s energy landscape and their role in it, Journal of Petroleum Technology reports.
Nursultan Nazarbayev, then president of Kazakhstan, took the first step in April 1993 by creating Tengizchevroil (TCO), a joint venture between Chevron and Kazakh state oil company KazMunaiGaz, to develop the super-giant Tengiz oil field and nearby Korolev field. Today, Chevron still holds 50% of the venture, ExxonMobil controls 25%, KazMunaiGaz, 20%, and LukArco, a subsidiary of Russia’s Lukoil, 5%.
A year and a half later, in September 1994, Azerbaijan’s president, the late Heydar Aliyev, signed a production-sharing agreement (PSA) to develop the deepwater reserves of the Azeri, Chirag, and Gunashli (ACG) fields, attracting the participation of a “who’s who” of the world’s oil and gas elit 13 global companies representing eight countries. These and other signings had a knock-on effect as more upstream megaprojects popped up across the region in the late 1990s and throughout the early 2000s, attracting more international participation and the need to develop midstream infrastructure such as Azerbaijan’s Baku‑Tbilisi-Ceyhan pipeline (BTC) export line to Turkey and Kazakhstan’s Caspian Pipeline Consortium (CPC) to Russia’s oil export terminal at Novorossiysk, as landlocked Central Asia devised ways to get its crude oil to market.
For a generation, the Caspian’s top-heavy “bigger is better” way of doing things, led by global majors, did a good job of attracting upstream investment. But what about the next generation as those same supermajors rebrand and shift their portfolios to produce more energy with less carbon?
Ashley Sherman, research director at Wood Mackenzie for upstream oil and gas, predicted in June that Caspian oil and gas production will continue to grow in this decade as already-committed oil and gas investments percolate through the system. These investments, however, target expansion and optimization of existing operations. Thus, by 2030, upstream capital expenditures are likely to be at only half of their 2019 levels, Sherman wrote.
BP and Socar’s (the state oil company of the Azerbaijan Republic) deepwater Shafag Asiman discovery in Azerbaijan may be an exception, but while a first exploration well drilled and completed in March detected gas condensate, the well was suspended pending further evaluation and possible drilling of a sidetrack appraisal well, BP said in a news release. The block lies 125 km (78 miles) southeast of Baku in an unexplored area in 650-to-800 m water depths.
It is likely that tomorrow’s Caspian upstream will look a lot like today’s Caspian upstream, which is dominated by five projects: the onshore Tengizchevroil and Karachaganak projects in Kazakhstan; shallow-water offshore Kashagan, also in Kazakhstan; and Azerbaijan’s offshore deepwater ACG and the Shah Deniz gas field. While each of these projects elicits a definite “wow” factor in terms of sheer size, it is worth noting that the PSAs on which most of the projects are based will expire in the 2030s, though some remain in effect into the 2040s.
New Math: Paris×4=1 Tengiz
Tengiz boasts an oil column that measures 1 mile (1.6 km) across and has a surface area more than four times the size of Paris. It is the deepest producing supergiant oil field and the largest single-trap producing reservoir in existence, according to TCO’s website. In 2020, Chevron reported its share of net daily production averaged 281,000 bbl of crude oil, 405 Mcf of natural gas, and 24,000 bbl of natural gas liquids.
Current expansion plans focus on investing in an integrated Future Growth Project-Wellhead Pressure Management Project scheduled to start up in late 2022, with all facilities coming on line by the middle of 2023. The project aims to raise production at Tengiz by about 260,000 B/D, thus extending TCO’s production plateau and keeping existing plants producing at full capacity. The project uses sour-gas-injection technology already proven during TCO’s 2008 expansion, according to the operator.
According to Lukoil, the wellhead-management system maintains plant capacity by lowering the flow pressure at the wellhead and then boosting the pressure to the inlet requirements of the six existing processing trains.
Karachaganak “Steppes” on the Gas
Kazakhstan’s second onshore producer is Karachaganak—one of the world’s largest gas-and-condensate fields. Italy’s Eni and Anglo-Dutch Shell (through its 100% affiliated company BG Karachaganak Ltd.) are joint operators with a 29.25% interest each in the KPO (Karachaganak Petroleum Operating) consortium. Other KPO partners include Chevron with an 18% interest, Russia’s Lukoil at 13.5%, and KazMunaiGas with 10%. Kazakhstan signed the initial PSA in 1995 with BG Group and Eni. The concession extends to 2037, according to Eni’s website.
The field covers 280 km2, and according to KPO, holds estimated hydrocarbons initially in place of 9 billion bbl of condensate and 48 Tcf of gas, with estimated gross reserves of more than 2.4 billion bbl of condensate and 16 Tcf of gas. In 2021, KPO completed a gas debottlenecking project; in 2019 the partners sanctioned a fourth injection-compressor project and launched a fifth trunkline project.
Kazkhstan’s only offshore project, Kashagan, was discovered in July 2000 in shallow water in the North Caspian. Like its onshore cousins, Kashagan is big. It is considered one of the largest fields discovered in the past 40 years, the largest field found outside of the Middle East, and has a projected output close to that of the Ghawar field in Saudi Arabia, according to the North Caspian Operating Company (NCOC).
NCOC operates the field under a PSA signed in 1997, with Eni taking responsibility for phase 1 of the field’s development and Shell assuming responsibility for production operations. The PSA runs through 2041. Eni subsidiary Agip KCO holds 16.81% in the consortium with Shell also at 16.81%. Other partners include ExxonMobil (16.81%), Total (16.81%), China National Petroleum Corp (8.33%, which was acquired from ConocoPhillips for $5 billion in 2013), KazMunaiGaz (16.87%), and Japan’s INPEX North Caspian Sea (7.56%), according to partner company websites.
Kashagan’s development activities in 2020 included a phased plan to expand production capacity from its initial target of 370,000 B/D. Phase 1 would upgrade existing associated gas compression-handling to raise production capacity up to 450,000 B/D, NCOC reported. Other upgrades relate to raising gas-reinjection capacity and delivering gas to a new onshore treatment unit.
BP and Partners Spend Another $6 Billion in Azerbaijan
Azerbaijan offers a slightly more optimistic picture with the ACG oil project and Shah Deniz gas and gas condensate development as centerpieces of the country’s hydro-carbon production. ACG produced 3.6 billion B/D of oil at the deepwater ACG and West Chirag locations from the start of production in November 1997 to Q2 2019. Of that, 3.3 billion bbl were exported via the BTC pipeline to global markets, according to BP.
Over the project’s 3 decades of life so far, the partners invested more than $36 billion and are now committing a further $6 billion to bring a new 100,000 B/D platform onstream in 2023 at the Azeri Central East field, a project that represents a new stage in ACG’s development. In September 2017, the partners agreed to extend ACG’s PSA by 25 years, to 31 December 2049. The revised PSA came into force in January 2018, and in 2019, a final investment decision was taken to invest in a new platform.
BP holds a 30.37% stake in the project; Socar holds a 25% interest. Other international partners include ExxonMobil, 6.79%; Japan’s IMPEX Southwest Caspian Sea, 9.31%; Hungary’s MOL, 9.57%; Norway’s Equinor, 7.27%; Turkey’s TPAO, 5.73%; Japan’s Itochu, 3.65%; and India’s ONGC, 2.31%. https://jpt.spe.org/chevron-sells-azerbaijan-assets-mol-hungarian-oil-and-gas
While ACG is largely an oil export play, Azerbaijan’s Shah Deniz, also operated by BP, is gas and herein lies a clue to the role that Caspian’s megaprojects may indeed have to play in the future energy transition: What oil was to the last generation, gas will be to the next. On its website, BP hails Shah Deniz, which it operates, as its “largest discovery since Prudhoe Bay” in Alaska (North America’s largest oil field, which was discovered in the 1960s).
In the first half of 2021, the Shah Deniz Alpha and Shah Deniz Bravo platforms produced 10 Bcm of gas and around 1.9 million tonnes (15.1 million bbl) of condensate. The gas is delivered to markets in Azerbaijan, Georgia, and Turkey, but the big news this year has been that as of 31 December 2020, connections through relevant pipeline systems had been made to finally deliver Azeri gas molecules to Europe.
In early October of this year, Lukoil announced it had agreed to acquire a 15.5% interest in the Shah Deniz natural gas project from Petronas for $2.25 billion pending various approvals. Lukoil President Vagit Alekperov said in a statement that the purchase is related to an agreement signed by the Russian and Azerbaijani governments in 2018 to promote stronger business ties. Completion of the transaction will raise Lukoil’s stake in the Shah Deniz project to 25.5% from its current 10% share. BP’s operator interest is 28.8%; Turkey’s TPAO has 19%; Socar, 10%, Iran’s Naftiran Intertrade Company, 10%, and the Southern Gas Corridor, 6.7%.
Small Trumps Big in a Sea of Megaprojects
While SGC (the Southern Gas Corridor project) may be the smallest shareholder in Shah Deniz, it could be the project’s most important partner and the guarantor of Azerbaijan’s future as a gas supplier to Europe. The SGC project aims to supply Europe with Caspian gas from the Shah Deniz natural gas condensate field through a network of three pipelines: the South Caucasus Pipeline (SCP), the Trans-Anatolian Natural Gas Pipeline (TANAP), and the Trans-Adriatic Pipeline (TAP).
SGC holds and manages participating interests of the Republic of Azerbaijan in the various upstream and midstream projects, which will require an estimated $40 billion in investment to complete, according to SGC. In the upstream, Shah Deniz phase 2 will, upon completion, add a further 16 Bcm of natural gas per year to the 10.9 Bcma (maximum production capacity) already produced under the first phase. The total length of three newly constructed pipelines in the system spans more than 3200 km, SGC reported.
The US Energy Information Administration noted in a recent country analysis that between the first half of 2018 and the first half of 2021, Shah Deniz production doubled. In September, TAP confirmed that 5 Bcm of natural gas from Azerbaijan had crossed the border into Europe via the interconnection point of Kipoi, at the Greek-Turkish border, where TAP connects to TANAP, and that more would be on the way.
TAP’s confirmation that Caspian Sea gas has reached Europe is not only good news for Azerbaijan and its international partners, it sends a signal to producers in the Eastern Mediterranean who want to supply gas to Greece and Italy but whose export pipelines exist only on paper. https://jpt.spe.org/israeli-gas-to-italy-is-new-flavor-of-the-month-to-supply-europe-from-offshore-gas-deposits-in-the-east-med
In many ways, today’s East Med is much like the Caspian of the 1990s—a frontier region replete with exploration and development opportunities for its first production projects.